Wise up: Do your homework and you can earn 10 per cent yields from student flats

Student accommodation has become barely recognisable to anyone who graduated more than a decade ago.

Slumming it in an overcrowded, freezing, rodent-infested house-share is ancient history: today’s students are living in increasingly luxurious purpose-built accommodation.

But do not worry if you missed the chance to live this particular student dream – complete with a cleaner, games room and gym.

You can invest in it instead.

Property analyst Knight Frank estimates the UK market for these purpose-built living quarters is worth £46 billion – and says it is expanding rapidly.

The firm’s latest student housing rental update shows that a further 25,000 student bedrooms will have been completed for the start of this new academic year, with 14,000 more ready for next year.

There are various types of property on offer to investors, ranging from en-suite ‘pods’ to studio apartments and ‘cluster flats’.

Blocks usually boast gyms, cafes, high speed wi-fi and communal areas. Many come with a concierge and are located in city centre locations or near university campuses.

The sales pitch to investors is compelling. Emerging Property, for instance, is offering pods from £49,950, promising 8 to 10 per cent net rental yields a year, zero costs for 10 years, full legal ownership and professional on-site management teams.

Share this article

HOW THIS IS MONEY CAN HELP

One Touch Investment is touting studios in Oakwood House, Sheffield. An investment of £59,950 gets you a fully furnished en-suite studio within walking distance of both university campuses in the city, assured net rental income of 8 per cent a year for three years, and a hands-off investment.

Other blocks being sold have not even been built. Hopwood House is selling units in Phoenix Place, Liverpool, from £49,950.

Investors can earn 5 per cent interest on their deposits, and then an assured 9 per cent net yield per annum for five years once the properties are completed in the autumn of next year.

But investors need to do their homework before investing because it could turn out to be an expensive lesson. Behind the glossy brochures lie some risks.

The first issue is that it is virtually impossible to get a mortgage to buy one of these investments – so you will need to pay cash up-front.

Student accommodation has become barely recognisable to anyone who graduated more than a decade ago. Slumming it is ancient history: today’s students are living in increasingly luxurious purpose-built accommodation

Mortgage lenders are not keen on student pods, mainly because each unit comes with a restricted covenant stating it can only be let to students. They also do not like the uncertain resale market.

With a mainstream buy-to-let property, investors can sell it at any time on the open market to another landlord or an owner-occupier. The same cannot be said for student units.

Rob Bence, founder of property investment company RMP Property, says: ‘The only way you can sell the pod is if another investor wants to buy. With so many schemes available, supply will always outstrip demand so that is unlikely.’

Many student units are sold ‘off-plan’, which means they carry the same risks as other uncompleted homes. If the developer runs into financial difficulties the properties might never be completed or, if completion is delayed, be worth less than predicted.

There is also the risk the finished article looks nothing like the brochure pictures. Investors worried about demand for student pods might be assured by the rental guarantees offered by developers. Sales agents typically promise a yield of about 7 or 8 per cent a year for three to five years. But any guarantee should come under heavy scrutiny.

Student blocks usually boast gyms, cafes, high speed wi-fi and communal areas. Many come with a concierge and are located in city centre locations or near university campuses

Bence says: ‘These companies are able to offer a guaranteed rental yield because they have already made a profit by charging an inflated price for the student pod.

‘There have been several schemes that have stopped paying out guaranteed rents soon after completion. Investors have then discovered the real market rate for rent is much lower.’

Tal Orly, chief executive of property investment company Cogress UK, says the safety of the rental guarantee depends on whether there is a lease from the university or if the flats are let individually.

Orly says: ‘The rental guarantee on student pods that come with a lease from a university would be considered safe for those looking to invest in purpose-built student accommodation.

‘This is because when student pods are rented out individually, there is a greater risk that the tenant will default and there is no security provided by an entity such as an university.’

Some property experts such as Savills and Knight Frank describe student housing as one of the best-performing asset classes.

It is why institutional investors such as the Canadian Pension Plan Investment Board, Aviva, BlackRock, LaSalle Investment Management and M&G have bought into the asset class.

Such organisations have the financial clout to ride out the occasional void or delay in rental payment. The risks are higher for individuals buying single units.

Location is a key issue. Proximity to the campus and other amenities such as shops, gyms and transport are all factors that students consider when deciding where to live.

Property developer Sam Collins says it is vital to understand whether any investment carries ongoing costs. These could comprise service fees for management of the let, as well as repair and maintenance bills.

He adds: ‘Such information is imperative in calculating genuine potential yields. A high service charge will eat into your yield.

‘If you are getting a rental yield of 10 per cent per annum but running costs amount to 7 to 8 per cent, your return will be next to nothing and barely worth the effort.’

Finally, check out any company you are thinking of investing with. Unfortunately, the property investment world is full of dodgy characters and broken promises.

Use both the internet and a company credit checking website to assess a firm’s financial fitness and whether any of the directors have a chequered history.

Don't forget the traditional, shared homes for undergraduates

While purpose-built developments are springing up in most university cities, there is still a market for investing in long-standing houses that have been converted into shared homes for undergraduate students.

Property consultancy Allsop reports a rise in the number of investors choosing this type of property. Partner Andrew Wells says: ‘Student houses can produce annual yields of up to 12 to 13 per cent in lower ranking university towns, and an attractive 7 to 9 per cent in towns and cities with universities at the top end of the league table.

‘Set against a national average gross yield on residential property of less than 5 per cent, it is appealing.’

But even student house investors should understand tenants now expect more from their accommodation.

A recent survey by Currys PC World Business found that nearly half of students would be willing to pay more for fibre-optic internet, while more than a third would not rent a property without internet connection.

Both Loughborough and Bath building societies offer ‘Buy for Uni’ mortgages which provide students with the opportunity to buy a property with financial backing from their parents.

Mark Harris, chief executive of mortgage broker SPF Private Clients, says: ‘Financing is available for up to 100 per cent of the property purchase, as long as close relatives provide security.

‘With such mortgages, the idea is that the rental income from letting other rooms to tenants covers the loan repayments.’